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How to work around or with ‘gotcha’ clauses in a lease

June 24, 2023

Last week we used a football theme to outline several “gotcha clauses” that appear in leases.

Akin to a quarterback sneak, these are there but get you when just you’re expecting a long pass.

I’ll give the football metaphors a rest until August, I swear. But today, and as promised last week, I’ll give you some strategies to offset these gotchas.

To review, last week’s column highlighted pass-through provisions, relocation, rent escalations, automatic renewals and uses.

Pass-through provisions: These can impact your bottom line, transferring unforeseen costs from the landlord to your business. Generally, during the term of a lease, increases over certain base year expenses are borne by the tenant. Such expenses as insurance, property taxes and the cost to mow the lawn are examples.

Consider capping specific expenses or requesting transparency through detailed documentation. Explore options such as a fixed monthly fee or excluding certain costs.

Relocation strategies: These clauses can disrupt your business operations and create uncertainty. If you’re an industrial tenant in a freestanding structure, your exposure is minimal as I’ve not seen relocation clauses in single tenant leases.

However, beware if you’re signing a multi-tenant lease of an office, retail or industrial variety. Here, spaces are more consistently “amenitized” and sized, leading to an owner’s ability to move you.

To avoid potential relocations, seek limitations on when and how the landlord can invoke this clause. Consider including provisions that require the landlord to cover relocation expenses or provide suitable alternative spaces.

Rent escalation mitigation: The value of a space that you occupy increases as the rent you pay to the owner increases. Therefore, most savvy landlords will want some bumps in rent throughout the term.

The most onerous of these would be an open-ended consumer price index increase on an annual basis. The opposite would be a flat rate with no increases throughout the term. We’ve witnessed many cases of single-tenant retail leases that carry no increases in rent throughout a five- or 10-year term.

These flat leases are rare in industrial and office leases. A hedge against annual increases would be to negotiate an increase midway through the term or alternatively agree to a full consumer price index increase at the beginning of any option period.

In today’s robust environment, however, you’d be better served to ask for a limit to the annual ups – a 3% vs 4% escalation

Automatic renewal management: Generally, you should be aware of automatic renewals in any multitenant industrial, retail or office lease.

The typical single-tenant industrial, retail or office lease normally will not carry this type of provision. In my view, this is a term that should be stricken as a business point or with a counter position that the lease becomes a month-to-month lease at the termination.

Automatic renewals can catch you off guard, potentially locking you into a long-term commitment without your consent. Additionally, seek provisions that allow for termination or renegotiation with sufficient notice before the renewal date.

Permitted uses: Language in most leases reads: “Upon your signature, you have reviewed the governing agency’s use provisions and have approved them.”

Many tenants sign leases without visiting the city in which the property is located to check on zoning, variances, conditional use permits and allowable uses within the zone. Consequently, they move in without a complete understanding of potential zoning limitations.

If a planned use is not allowable within the zone, I generally recommend hiring a consultant to deal with nuances of governmental zoning. I’ve experienced too many situations – sans consultant – where an unforeseen requirement arises and results in an unexpected expense.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.

Orange County Register

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How to work around or with ‘gotcha’ clauses in a lease

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